Is Britain a safe haven? Not for long, at this rate

David Cameron's optimism about the UK economy in the Commons may prove to be misplaced. Photograph: PA

The renewed tensions in the eurozone show the importance of having a plan to get on top of your budget deficit and your national debt. That was the assessment of David Cameron, speaking in the Commons on Wednesday.

It's easy to see why he was in a bullish mood. Unemployment figures were good, Britain is seen as a safe haven, and there is no immediate threat to the UK's cherished AAA status. But is the UK really getting to grips with its deficit? The government has a plan: the question is whether it is working.

Research by the International Monetary Fund suggests Cameron should perhaps be a bit more circumspect with his claims. Every six months, the fund produces its Fiscal Monitor, which looks at the finances of each member state. Its findings are not encouraging.

"In the UK, actual and potential GDP growth estimates have been revised down, resulting in weaker projections for both headline and cyclically adjusted balances," the fund says.

This is a double whammy. Not only is growth currently weak, the damage caused to the economy by the recession means that its ability to grow in the future has been impaired. That means the public finances look worse, both in headline terms and also when adjusted for the economic cycle.

Last September, the IMF expected the UK to run a budget deficit this year of 7.1%, falling to 5.1% in 2013. The latest estimates are for 8% this year and 6.6% next – a sizeable deterioration.

Not all of this is due to the flatlining of the economy since the third quarter of 2010. The forecast for the cyclically adjusted deficit has been revised up from 4.7% to 5.1% this year and from 3% to 3.8% in 2013. Put into context, Britain's finances are in worse shape (both in headline and cyclically adjusted terms) than those of Italy and Spain – countries at the centre of the euro crisis. The forecasts run until 2017: by then the UK will still be in deficit on both measures.

A number of conclusions can be drawn. First, it is not true that the deficit reduction plan set out by the coalition is working. Progress has been much slower than forecast.

Second, unless the government's supply-side reforms can boost the economy's potential growth rate, knocking the public finances back into shape will require yet more austerity.

Third, it is something of a miracle that the markets have yet to latch on to the UK's combination of weak growth and unmet deficit-reduction targets. The fact that Britain is not part of the single currency, and can thus allow its currency rather than its bond market to take the strain of adjustment, probably has something to do with it.

Fourth, ministers would be unwise to imagine that the UK will remain a safe haven for ever. Should the economy continue to flatline for a further six months, the markets might start to look at Britain with a more critical eye.